One market we are often asked about is India, where we currently have no exposure. India has grown to represent a 14% weighting in the index and we do follow Indian equities closely. India has benefitted from significant flows as global investors have sold China and switched into the “other 1bn+ population” market. This coincides with heavy domestic retail participation and generally very low free float available in Indian companies due to high promoter holdings. As a result valuations have become unattractive and there are some potential warning signs of a market bubble even as the rest of the world copes with tightening liquidity.
A great example of this is Indian self-made billionaire Gautam Adani challenging Jeff Bezos for the position of the worlds second richest person with a paper fortune of US$154bn. This is based on a collection of his eponymous companies which have shot up over the past year and trade on outlandish multiples to earnings despite mundane growth rates. For example, Adani Transmission – an electric grid utility – is on 330x current year’s earnings (or a 0.3% earnings yield), while growing at an unspectacular 10% annually. Like many Indian entrepreneurs, he is a great communicator and has captured investors’ imagination with visions of a new energy future.
MSCI India trades around 22x current year’s expected earnings which is record for that market and compares to historic valuations of between 13x and 16x. This compares to the MSCI Emerging Markets index on 11x, roughly in line with historic levels but after the traditionally cheapest market (Russia) has dropped out, while the most expensive one (India) has increased its weighting significantly.
As a result, India’s record valuation feels even more out of kilter with its peers. For example Brazil and Taiwan are trading 1 standard deviation below their historic average valuation since 2005, while India is 1.5 standard deviations above. Or put another way, Indian multiples are double those in Taiwan when historically they have traded similarly or even at a discount.
While we appreciate the Indian macro situation has been bolstered by strong Monsoon seasons and cheap Russian oil, the cost of capital hasn’t changed much from the past decade, with 10 year yields on Indian bonds a little above 7%. As always we focus on value in the portfolio and find better opportunities in LatAm, the Middle East and other Asian markets which already reflect the challenging global macro situation. While this may not be current market preference, our experience tells us that valuations do eventually revert to mean.
